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San Juan Capistrano

City Loses Appeal in Water Rate Lawsuit by Kim Lefner

The Fourth Appellate District Court upheld the lower court ruling that sided with the Capistrano Taxpayers Association’s claim that the City illegally billed water customers with its tiered billing system.
The CTA had repeatedly warned the previous City Council that its tiered water billing system was unconstitutional because the rates were not tied to actual cost of service as mandated by California Proposition 218.

In 2010, City Council members Sam Allevato, Larry Kramer and John Taylor were warned repeatedly by then-CTA Board member John Perry (now a City Council member) that the tiered water rates violated Proposition 218. The council majority ignored the warnings and voted to increase rates anyway, claiming that the increases were necessary to promote water conservation by punishing water users who exceeded their allocations (set by the City) with progressively higher prices.

The rates adopted by the previous council majority progressed from a base rate in Tier 1 for indoor use, to Tier 2 which increased the rate by 33% , then to Tier 3 which increased it by 50% and finally to Tier 4 which increased the rate by 83%. The CTA contended that the rate increases were not proportional to the cost of providing water service as required by Proposition 218. The previous council majority and City’s claims about the need for water conservation did not ring true in 2010 as it was a record wet year, thus there was no need to conserve as in times of drought. Records indicate that the real reason for the draconian rate increases was to offset the huge cost of financing and operating the Ground Water Recovery Plant (“GWRP”), a problem that persists to this day.

In addition, the CTA claimed the City violated Proposition 218 by charging ratepayers for recycled water even though recycled water was not available to residential customers. Proposition 218 requires that to be charged a fee, the service must be immediately available to all City customers.

The court ruled that recycled water could be included in the water rates in order to pass on the costs for capital costs of water supply improvement projects, such as a recycling plant, to its customers. However, the court sent back to trial court (Superior Court) the question of whether recycled water costs imposed on low-level water users (Tier 1) exceed the cost of service to those customers.

Next steps Water rates may have to be recalculated if the current water rate study conducted by the City does not show a clear nexus between the tiered rate and the cost of service. The Court clearly said that rates cannot be used to punish customers who exceed their allocations in order to change their behavior; that rates must be based on actual cost of service.

The City must also now seek a settlement for payment of the CTA’s attorney fees as awarded by the Superior Court in the initial trial, and for the attorney fees incurred for the appeal. City negotiations with the CTA (plaintiff) have been initiated and are ongoing.

The outside attorney hired by the previous council majority to represent the City, “water expert” Michael Colantuono, essentially admitted during trial that the City was unable to demonstrate that the tiered rates were justified by the cost of service, yet taxpayers will have to pay this “expert” approximately $368,000 in legal fees. That does not include the approximate $224,000 awarded to the CTA attorney by the court, nor does it include the legal fees incurred by former City Attorney Hans Van Ligten of Rutan & Tucker, who advised the City to fight the lawsuit. It also does not include the cost to the City for appealing the lower court decision. All told, the expenses for the water rate lawsuit could easily top $1 million.

The City must also decide whether to refund customers who were illegally charged for higher tiered water rates. When the council was warned about the illegal rates in 2010, they were also warned that they could be subject to refunding customers who were overcharged. It remains to be seen whether the new council will take up the issue of refunds.

This all could have been avoided had the previous council majority of Sam Allevato, Larry Kramer and John Taylor listened to the CTA, which repeatedly warned them that their tiered rates violated the state constitution.

Do you think customers who were overcharged for water should be refunded? The CCS wants to hear from you! Email us at: eboard@ccsense.com . Your privacy will be respected; we will not print your name without your permission.

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Capistrano City Hall Compensation

With high unemployment levels and with our City's debt at over $100 million, reigning in City costs is more important than ever. In a recent CCS article, we published a detailed list of City Hall compensation and benefit expenses by position and employee. You can view the details yourself and decide whether you think this is a good use of scarce taxpayer dollars.